NCS Multistage Holdings Inc (NCSM) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Q4 2017 NCS Multistage Earnings Conference Call. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Ryan Hummer, Chief Financial Officer. Sir, you may begin.

Thank you, Chelsea. And thank you for joining NCS Multistage's Fourth Quarter 2017 Conference Call. Our call today will be led by Robert Nipper, our Chief Executive Officer, and I will also provide comments.

Before we begin our call today, we'd like to caution listeners that some of the statement that will be made on this call could be forward-looking statements. And to the extent that our remarks today contain information other than historical information, please note that we are relying on the safe harbor protections afforded by federal law. Such forward-looking statements may include comments regarding future financial results, which are subject to a number of known and unknown risks. I'd like to refer you to our press release issued last night along with other public filings made from time to time with the Securities and Exchange Commission that outline those risks.

I also need to point out that in our earnings release and in today's conference call, we have discussed and will refer to adjusted EBITDA, adjusted EBITDA margin, adjusted net earnings per diluted share and free cash flow, all of which are non-GAAP measures of operating performance. We use these measures of operating performance because they allow us to compare performance consistently over various periods without regard to costs associated with our current capital structure and in a manner that we believe better reflects our ongoing operating performance. Our press release from yesterday, which is posted on our website, ncsmultistage.com, provides reconciliations of these non-GAAP financial measures to net income, the nearest GAAP financial measure or to cash flow from operations in the case of free cash flow.

With that said, I'll turn the call over to our CEO, Robert Nipper.

Thanks, Ryan, and welcome to our investors, analysts and employees joining our fourth quarter 2017 earnings conference call. Today I'll review some of the highlights from the fourth quarter and the year, and we'll touch on what we are seeing in our U.S, Canadian and international operations, after which I'll turn it over to Ryan to discuss the quarterly results in a bit more detail. I'll also provide some closing remarks touching on some of our recent accomplishments.

Our results in the fourth quarter reflect the continued execution of our strategy. Total revenue in the fourth quarter was $50.2 million, a 42% improvement over the year-ago period. Revenue for 2017 of $201.6 million represents a 105% increase compared to 2016. Our execution is also demonstrated through our adjusted EBITDA performance. Adjusted EBITDA in the fourth quarter of $10.4 million reflects a 21% adjusted EBITDA margin and was an increase of 52% from the year-ago period adjusted EBITDA of $6.8 million. Adjusted EBITDA for 2017 of $49.5 million reflected a 25% adjusted EBITDA margin and compares to $13.9 million for 2016.

For the entire company, our total number of sliding sleeves sold during 2017 was 46,917, an 82% increase from 2016. We also completed 1,387 wells for our customers during 2017, a 56% increase from 2016.

In the U.S, our revenue for the fourth quarter was $20.1 million and it was 132% higher than last year, and was 51% higher sequentially. The increase was driven by a full quarter contribution from our tracer diagnostics business and by an increase in sliding sleeves sales in U.S. of over 25% as compared to the third quarter, partially offset by relatively flat sales from other products, including airlocks, composite plugs and liner hangers in the quarter.

For the full year, our U.S. revenue in 2017 was $63.9 million, 186% higher than in 2016, demonstrating the significant opportunity ahead of us as we continue to gain share in the U.S. market and pinpoint completions, as we leverage the combination of Spectrum and as Repeat Precision continues to grow following the commercialization of our PurpleSeal family of composite plugs.

As we mentioned on the last quarter's call, we look at a number of different factors in evaluating our performance in the U.S. and the progress that we are making in growing our U.S. market presence. During 2017, we completed wells using our multistage unlimited pinpoint completion technology for over 20 customers across multiple basins in the U.S, with the Permian representing the most active area. This number was up from the more than 15 customers we had worked for during the first 9 months of 2017. These customers include super majors and large independents as well as private companies that are family-owned or backed by private equity. The customers we worked for in 2017 collectively were running a total of approximately 170 rigs in the U.S. as of the end of February, 2018. We had several customers that utilize our technology in the majority of their operations in a given area or are repeat customers. We have had initial success in cross-selling existing customers, supporting their completion strategies in multiple operating areas.

We continue to learn from each and every job. We have customers that are making changes to their approach with our technology as they migrate from use on single wells or partial pads to full pads, taking advantage of the pressure and temperature data that is collected on each NCS job. We also learned more about individual customer drivers, which helps us to target our sales efforts, and also guide us as we develop the next generation of our technology. We are increasingly focusing our sales efforts on applications where pinpoint completions can deliver upfront savings costs and meaningful operational advantages. This helps to compress the upfront customer sales cycle and can also accelerate the conversion from initial wells to repeat work. Examples of these applications include certain formations where precise control of fracture propagation is required to avoid connecting with water bearing zones near the target formation as well as in lower-pressured and normally pressured formations with our significant operational challenges, which are frequently encountered when drilling out composite plugs.

As we've discussed on prior calls, the progression of our growth in our U.S. business is likely to experience significant variability on a quarterly basis. This shows up most prominently in our product sales line, which can be influenced by multiple well orders for sliding sleeves and the timing of sleeve installations in customer wells.

During the first quarter of 2018, our U.S. business has been impacted by some third-party completion-related logistical challenges, which have led to delays in completions, primarily impacting our tracer diagnostics business and delays in sliding sleeve installations, which has impacted the sales of our sliding sleeves. These range from proppant availability, as noted by other service companies, as well as other certain issues with certain customers in the Permian Basin where we've had out of spec casing connections. We believe that these logistic issues are temporary in nature and that many are in the process of being resolved. One of the bright spots in the U.S., so far this quarter, has been the market adoption of our PurpleSeal composite frac plug, which has seen a strong increase in sales starting in December of 2017 as we brought on sales resources to market directly to end-users, supplementing existing distributors of the product. Despite the logistical challenges, for the first quarter, we continue to expect that our U.S. revenue, inclusive of Repeat Precision and our tracer diagnostic services offerings, will be higher on a sequential basis than in the fourth quarter of 2017.

Turning now to our Canadian operations. We were able to outperform the guidance we provided on the third quarter call. Revenue for the quarter of $29.4 million was up by 18% compared to the year-ago period, but was 27% lower sequentially. For the full year, our Canadian revenue of $127.9 million was 82% higher than during 2016. This speaks to the success our team has had in growing our market position, especially in the deep basin plays that we have increasingly been targeting over the past several years. We are also very pleased with the performance of our Canadian operations thus far in the first quarter. While the overall rig count in Canada has been slightly lower than in the first quarter of 2017, a higher percentage of the rigs that are operating are targeting oil and liquids-rich gas, which has historically represented the majority of our work. As a reminder, the first quarter is typically the highest-revenue quarter for our Canadian business. It's difficult to predict the revenue performance for the quarter even today, as the timing and magnitude of spring breakup can vary significantly from year to year. Operations are already winding down in Saskatchewan, Manitoba and Southern Alberta, while activity continues in Northern Alberta and BC, including the Cardium, Montney and Duvernay. Given this supportive oil price backdrop, we expect that customers in these areas will work for as long as they can until road bans are put in place.

For the first quarter of 2018, we expect that revenue from our Canadian operations will meet or slightly exceed the $42 million in revenue from the first quarter of 2017, despite the fact that average rig count through the first 9 weeks of the quarter has been 7% lower so far in 2018. Our international revenue for the fourth quarter of $0.7 million trailed our results from the fourth quarter of 2016, and the results from the third quarter. Results of our international operations will continue to be volatile and we expect revenue for the first quarter of 2018 to be between $1.5 million and $2 million. At this point, we are maintaining our full year guidance on revenue of an increase of 35% to 45% in 2018 as compared to 2017, and we'll update the range as we progress further into the year.

I'll now turn the call over to Ryan to discuss our financial results in more detail.

Thank you, Robert. As reflected in yesterday's earnings release, our fourth quarter revenues were $50.2 million compared to $35.4 million in the prior year's fourth quarter, an increase of 42%. The increase in revenue was driven by a combination of higher overall industry activity, increased completions intensity, increased market share for NCS and 3 months of contribution from Spectrum. On a sequential basis, revenue in the fourth quarter was 10% lower than revenue in the third quarter, as the sequential revenue declines in Canada and internationally, more than offset the 51% sequential increase from the U.S. business. Gross profit, defined as total revenue less total cost of sales excluding depreciation and amortization expense, increased to $25.6 million in the fourth quarter or 51% of revenue as compared to $15.5 million or 44% of revenue in the prior year's fourth quarter due to higher revenue, better utilization of our fixed operating cost base and favorable exchange rate impacts due to an appreciation in the Canadian dollar. For a sequential comparison, gross profit was $30 million or 54% of revenue in the third quarter of 2017.

Selling, general and administrative costs increased to $18.1 million in the fourth quarter from $11.7 million in the prior year's fourth quarter and $17.6 million in the third quarter. As a reminder, our reported SG&A includes share-based compensation as well as certain nonrecurring expenses. The year-over-year increase was driven by a growing headcount to support the growth of our business, increased salaries, higher bonus accruals, increases to the share-based compensation and the inclusion of SG&A related to Spectrum's operations for the full quarter. Our SG&A in the fourth quarter was slightly below the low end of the guidance we provided last quarter, which primarily resulted from the reversal of unused vacation accrual in the U.S. at year-end. SG&A, as a percentage of revenue, was 36% in the fourth quarter as compared to 33% in the prior year's fourth quarter and 32% in the third quarter of 2017. For the first quarter, we expect our reported SG&A, inclusive of share-based compensation and nonrecurring items, to be between $20 million and $21 million, with the increase compared to the fourth quarter, primarily resulting from strategic headcount additions during the first quarter in engineering, Anderson Thompson reservoir services and technical services. The inclusion of Spectrum employees in NCS's benefits plan in 2018 also contributes to the increase on a quarter-over-quarter basis as does the absence of accrual-related items that I mentioned that were specific to the fourth quarter of 2017. We expect that our SG&A will continue to move modestly higher from first quarter 2018 levels as we progress through the year, as we make additional strategic hires to support our growth and as share-based compensation expense increases to reflect the adoption of our annual long-term incentive compensation plans.

Our fourth quarter 2017 depreciation and amortization expense totaled $7.1 million, and we expect our first quarter depreciation and amortization expense to be between $4.5 million and $5 million, with the decrease primarily related to the reduction in amortization expense which occurred as certain intangibles with 5-year lives that were associated with the advent recapitalization from 2012 were fully amortized in December of 2017, with those items not incurring any additional amortization expense going forward.

Adjusted EBITDA for the fourth quarter was $10.4 million, an improvement of $3.6 million as compared to the $6.8 million adjusted EBITDA in 2016's fourth quarter. Adjusted EBITDA, as a percentage of total revenue, was 21% in the fourth quarter of 2017 as compared to 19% in the prior year's fourth quarter. In the third quarter of 2017, adjusted EBITDA of $15.1 million was 27% of revenue.

A couple of other items to note with respect to our income statement in the fourth quarter: First, we recorded a noncash expense of approximately $5 million, which reflected an increase to the liability that we have on our balance sheet related to the contingent earnout provisions associated with Repeat Precision and Spectrum. The value of these liabilities will be measured quarterly, with increases to the liability, as we saw during the fourth quarter, resulting in an income statement expense and any decrease to the liability having the opposite effect.

The second item of note is that our book effective tax rate for the quarter was 26%. The calculation of our book tax rate included several adjustments related to U.S. tax reform, which were largely offsetting in nature.

Our diluted earnings per share in the fourth quarter was a loss of $0.08, which compared to a loss of $0.03 in the prior year's fourth quarter. Adjusting for certain items, primarily the expense related to the increase in the contingent liability, increased our adjusted diluted earnings per share for the fourth quarter to $0.01.

Turning now to cash flow items and the balance sheet. Cash flow from operations for the fourth quarter was $13.2 million, bringing total cash flow from operations to $16.1 million for the year. Our net capital expenditures, excluding acquisitions for the fourth quarter, was a negative $0.1 million, reflecting proceeds from asset dispositions which were in excess of our capital spending. That brought total net capital expenditures for the year to $5.1 million. Free cash flow, which we define as cash flow from operations less purchases of property and equipment plus proceeds from the sale of property equipment, was $11 million for the year. At December 31, we had $33.8 million in cash and we had total debt of $27 million, which included $20 million that was drawn under our U.S. revolving credit facility. We also have up to $55 million in total availability under our revolving credit facilities, bringing our total potential liquidity at year-end to approximately $89 million.

We expect that our net interest expense will be between $0.5 million and $0.6 million in the first quarter, and we expect our book effective tax rate for the full year in 2018 to be between 26% and 30%. We currently expect our consolidated capital expenditures for 2018 to be between $15 million and $18 million, which includes capital spending for Repeat Precision, Spectrum as well as NCS Multistage Unlimited business. The primary components of this capital expenditure are related to the development of our tech center in Calgary as well as spending related to the implementation of the new ERP system, both of which we expect to complete during the year. One additional note from a tax standpoint is that we made cash tax payments of over $14 million in the first quarter of 2018 related to the deferral of tax payments in the U.S. as permitted following Hurricane Harvey and to true up estimated and actual taxes owed in Canada.

I'll now hand it over to Robert for closing remarks.

Thanks, Ryan. Before we open up the call for Q&A, I'd like to highlight a couple of our accomplishments during the first quarter and so far this year. In Canada, we set a new NCS record for the number of sleeves completed in a single run on a well in the Montney, a well that utilized 168 stages and over 18 million pounds of proppant. This well had a 9,960 foot or 3-kilometer lateral and was completed in 6 days. This reflects just how robust our technology is, combining the continuous improvement driven by our engineering efforts and the know-how that we have gained as a leader in pinpoint stimulation, a result of having completed over 9,200 wells with our customers. This wasn't a one-off science experiment either. We have installed or completed 6 wells, each with over 150 stages with this customer over the last 4 months.

In our international operations, we successfully installed sleeves for an offshore application in the North Sea, a first for NCS. This represents a tremendous accomplishment for us, demonstrating the strength of our customer relationships and the capabilities of our engineering and manufacturing teams. The well is scheduled to be completed in the second quarter and has the potential for follow-on work later this year.

We will also be completing our first onshore well in the U.K. in the coming months. In the U.S, we continue to add to our customer base, having worked for over 20 customers in 2017. Our recently adopted strategy for sales are bearing fruit, and so far in 2018, the majority of customers that we have worked for are repeat customers.

From a product adoption standpoint, we sold more airlocks in 2017 than we had from the time we introduced the product in 2013 through 2016, combined. Spectrum Tracer services has been outperforming our expectations from the start, and we are delivering on the sales synergies we had expected from the combination.

We are extremely excited about the growth prospects for Repeat Precision. By supplementing our distribution partners with direct sales, we are building our customer base and also increasing the average selling price per plug. After generating losses in 2017, we expect Repeat Precision will become a positive contributor to our earnings in 2018.

I'll close with just a couple of quick comments. First, NCS is delivering on differentiated growth thorough our leverage to completions activity, completions intensity and our ability to drive further market share gains relative to traditional completion methodologies. The addition of Spectrum provides another growth opportunity for NCS, and we believe that the combination has an opportunity to enhance the growth profile of NCS's business in the United States over time. Through our Repeat Precision joint venture, we are participating in 90-plus percent of the wells in the U.S. that are currently being completed using plug-and-perf. A reminder, that we built this product line from scratch with a modest initial investment. We are focused on creating long-term value for our shareholders. We are and will continue to be responsible stewards of capital.

And with that, we'd like to open it up to questions.

(Operator Instructions) And our first question comes from the line of James Wicklund with Credit Suisse.

It sounds like you're doing work for more people than just doing low-pressure well work. I'm saying that with a little bit of humor in my voice. North Sea, 186 stages and deep wells in Canada were drilled, complex wells in the Permian. Can you talk about the base of wells that you're working on? Does it cover the entire spectrum of high pressure, low pressure oil, gas? And have you found limitations as to where you are useful yet?

Well we've found a lot of applications that we are useful. As you pointed out, we've worked on a lot of different types of wells over the quarter and over 2017. In the Permian, we work in some of the applications that I talked about in the prepared comments, where they have problems drilling out plugs because of underpressured situations in the reservoir. We are doing wells where we have 150 or more sleeves in the well that we go in and shift, and there's cost savings for the customers with the time that we're able to do that. And these are in wells with long laterals and with deep true vertical depth. So far, we're seeing where we can add value to customers in many different types of wells in virtually all the basins in North America.

Okay. That's helpful. And originally, the overall idea was to -- the benefit of NCS was the high incremental margins, the high returns and you're guiding to 35% to 45% revenue growth this year. What kind of incremental margin should we see on that kind of revenue growth? And I realize that different businesses are different, so if you want to just talk bottom line, that's fine. But it just strikes me as -- where you're margins are. I guess the question is, where can they go to.

Yes, Jim, so this is Ryan. So this year, from an incremental margin perspective, we kind of walked through the guidance on SG&A. What we'd expect is that our incremental margin this year will be roughly in line with our full year margin in 2017. And part of that has to do with our gross margins, we've picked up quite a bit in 2017. We don't expect gross margins to increase by 500 basis points again in 2018, hopefully there's a little bit of -- a little bit of opportunity there. And then with respect to SG&A, the 2018 versus 2017 comparison has 4 months prior to us becoming a public company. And it also has 8 months prior to Spectrum. So when you wrap all that in, we are certainly making investments in the growth of the business through SG&A, which will limit the incremental margins, I'd say, in the first half of 2018. But as those -- as we get to, sort of, full rates comparisons to the second half, which are year-over-year from the full public company expense profile, that's when you'll see incremental margins have an opportunity to move a little bit higher.

That's very helpful. And the last one, if I could squeeze in. The -- you've got $89 million of borrowing capacity liquidity. You've already made a couple of acquisitions, you've invested in your Repeat Precision. What are you going to do with all the money?

Well we're still investing in technology. We're looking for opportunities to grow the business, both organically and inorganically. We've got some debt to pay down, which we'll be paying off later this year. But as we continue to generate free cash flow, we'll work with the board and determine the best way to return the cash to shareholders.

And our next question comes from the line of George O'Leary with Tudor, Pickering, Holt and Co.

On the -- historically, you guys have -- you don't provide necessarily specific guidance for the forward quarter, but you'll -- you've given us color as to whether you think street estimates are possibly in the right ballpark. And fully understanding that there have been a myriad of logistical, weather and other issues in the first quarter in the U.S. in particular, but sounds like some other issues also in Canada, potentially moving proppant up in the first quarter. Just curious if you think the street is maybe in the right ballpark for the first quarter? I realize you're going to get a nice snapback in that Canadian market, but could the U.S. side of the equation play out a little bit weaker than we might have expected a couple of months ago, just given the logistical issues?

Yes. So George, this is Ryan. As I look at consensus and kind of unpack it between U.S., Canada and international on the revenue side, I'd say we did give the guidance on the call that we expect sequential revenue growth in the U.S. for the quarter. I think, obviously, if we weren't confident being able to at least achieve that, we said we -- we would say we'd be flat to up. But at the same time, there may be a little bit of a performance or -- the performance in the first quarter maybe a little bit below where street consensus is in the U.S. from the revenue standpoint, but not material. And I think in Canada, as we alluded to, we kind of gave a baseline for where we think we can get to. And being able to push beyond that will be dependent upon the breakup in the behavior of customers later in the quarter -- or later in the month, quite frankly.

Okay. That's super helpful. And then Robert, you gave some good stats on kind of well design and some of the -- to Jim's point earlier, some of the more complex or higher-pressure wells that you guys are working on. Just curious: a, are you guys doing a little bit more work, it sounds like some E&Ps are pursuing some hybrid fracs; and then b, marrying that up against winning some work on the more complex side of the equation with very high sleeve counts, and maybe breaking it down between the markets, if you will, and I apologize for the long question. But on average sleeves per well, how would you expect that to trend for the business and then for the different geo markets you're in?

Yes. So in Canada, let's talk about that first, so we expect those average sleeves per well to continue to increase in Canada. And that's driven primarily by market share gains that we're making in the deeper basin plays. So in the Cardium, the Montney and the Duvernay. So those well count -- or those stage counts are a lot higher there than our core business in the lateral plays. So as we continue to penetrate that market, it will drive a higher average stage count. In the U.S, we continue to see stage counts increase. Two things: number one, just as the lateral lengths get longer, that drives more stage count. But that as we gain market share in some of these more complex wells, then that will also drive it as well. You asked about hybrid completions, I'm assuming when you say hybrid completion, you're talking about completions that have 1 type of completion method in the toe of the well and maybe sleeves in the upper part of the well. Is that correct or...

Exactly.

Yes. So if we go back to 2013, when we first made our entry into the U.S, we did see some of that in our business. That was back when we were still evolving the technology. A long lateral for us at the time was a 1-mile lateral, and we would run ball sleeves that were cemented in place in the toe of some of those wells and then run coiled tubing shiftable sleeves above that. What we've seen so far in the U.S. is that we haven't gotten to the extent where we can't reach with coiled tubing. So just as an example, we've done something in the neighborhood of just over 100 wells where the length of the lateral was longer than 9,000 feet. And so we have the ability to get further out in the wells. I think that we'll see some of the -- potentially, could see some of the hybrid type wells come if the well length or the lateral lengths continue to grow. But so far we haven't seen that. We've been successful through our technology and procedures in being able to get pretty far out in some of these laterals.

Super helpful. And then maybe if I could sneak one more in just on that note, you guys are constantly working to innovate the products you develop, maybe an update on where you stand from working on intervention-less sleeve solutions, improving the mill-out times of those composite bridge plugs that you guys make, and then maybe even pushing Spectrum into new applications.

Right. So for the composite plugs, we've just completed commercialization in the fourth quarter last year. Full commercialization of those product lines. If you'll recall, we started working on that product line in approximately February of last year, when we closed the joint venture. And so we've got it a little bit faster than we had planned, but not as fast as we had hoped. So we're fully commercial now. And one of the things we had done through getting to being commercial was focus on designing the plug and the materials so that drill-out times could be optimized. And what we're seeing now in the field, we're averaging drill-out times of something in the neighborhood of 5 to 7 minutes. So we think we've made a lot of progress there. And I think there may be some opportunity to increase that. But one of the thing that we've been doing is trying to make sure that when we drill those plugs out, that the debris that we generate is very, very small and is easily circulated out of the wellbore. So we have been able to do that. With the Spectrum tracers, as the business has overperformed what our expectations were, I think that's due to 2 things. One is, the synergies that we're getting from the combination of the 2 companies, where our traditional NCS sales team has been able to pull through Spectrum tracers very quickly into our customers that weren't Spectrum customers. But also Spectrum continues to get further adoption with some of their newer products with the oil-soluble tracers, now with commercializing water-soluble tracers, that should continue as we roll out that product line in real time now. But we also are getting further penetration in more of the pad wells, where we're looking for wellbore -- well interconnectivity and the interference. So customers are adopting the technology for that. And we're also seeing opportunities to get more quantitative measurement using tracers where today it's qualitative. So as we're able to not only just tell customers which stages are producing oil and what stages are producing fluid from the well, or water from the well, we move to where we can tell how much of the total production is coming from each one of those stages, we think that, that will drive further adoption as well.

And our next question comes from the line of Sean Meakim with JPMorgan.

So sticking with Canada a little bit, I was just -- was curious if you could maybe elaborate a bit more on the outlook. In other words, you touched on some of the key drivers, I was hoping maybe we could rank them a bit, thinking about -- is the primary delta of your performance on top line relative to stage -- to rig count just a function of stage count or is it pricing mix, you mentioned market share as well. So maybe just thinking about just general stage count growth, pricing, mix and market share, kind of, how would you rank the drivers that are contributing to your outlook for Canada in '18?

Yes, Sean. So I think primarily, the drivers for us in 2018 is going to market share. As you know, we have really high market share in the light oil plays in Canada. And we work hard to continue to improve our customers' operations there so that we can maintain that market share. So the big driver for us is where we have less market share, and that would be in a deeper plays in even the Cardium, but primarily, in the Montney and the Duvernay. The wells are -- lateral lengths are longer, there's a larger number of sleeves in those wells than in our traditional business in light oil plays. So as we continue to gain market share care there and the lateral lengths become longer and more completion intensity in the wells where the stage increases -- or the stage counts increase, that drives the business primarily. And so that would be the mix of types of wells. But market share is the primary driver. Pricing, we don't really see a lot of relief on that in Canada. We may see something modest but nothing that will materially move the needle in Canada. Right now, we're working through engineering efforts to try to engineer continued cost -- continue to engineer cost out of the system so that our customers can get better pricing without us taking it out of our pocket. So that's how we think about the drivers there. Rig count, it's not that big of a driver for us today in terms of growing. The 35% to 45% that we're saying that we're going to be able to increase revenue year-on-year, primarily that's coming from the U.S. We expect Canada to be up slightly. We think capital spending is going to be in line with what our customers have told us before. So we'll just watch that through the year. The biggest wild card, I guess, right now for us is breakup. Right now, we have some of the highest activity in terms of completing wells that we've seen in our history in the light oil plays, but that's this week. And so we're expecting that by next week that, that part of Canada's business is probably going to be shut down for us. But we are still seeing strong activity in Northern Alberta and BC, so that will keep going. And one of the things that as we continue to gain market share in the Montney and the Duvernay and the Cardium, one of the things that we think we'll see is less impact from breakup -- but we could still have operations that are going through breakup because of some of the large pads that we're working on.

Got it. That was very helpful detail. And just one more I had. Just thinking about the earnout, can you maybe just talk about what drove the $5 million number with Spectrum and Repeat Precision? Obviously, the implication is positive. But maybe just -- could you elaborate a bit on the customer reception for Spectrum compared to initial expectations?

Yes. So Sean, that increase in our liability was across both the earnout for Spectrum and the one for Repeat. Maybe starting with Repeat, as Robert had mentioned, we got to the point where we've fully commercialized the full PurpleSeal product line by the end of the year, by the end of 2017. That Repeat Precision earnout is based solely on 2018 performance. So as that product line has been commercialized, we've seen good traction so far this year. And the valuation of that earnout is really based on the forecast that we have for the profitability. It's kind of -- it's an adjusted gross profit metric but it's really the more equivalent of EBITDA for that business. And based upon the calculation, that earnout is now in our books for -- I believe it's about $9.1 million out of potential $10 million. So that could increase a little bit as we get through the year, really just as the timing moves it closer to the $10 million figure. With Spectrum, the earnout there was initially booked at about $350,000 in the fourth quarter, based on the performance of the -- and that earnout is measured over a 15-month period, which began in the fourth quarter of 2017 and extends through the full year 2018. So as Robert mentioned earlier, the Spectrum business has outperformed our initial expectations from the start. So it really reflects more of the actual performance for that fourth quarter of 2017 as well as what we see going forward. So potential earnout there is $12.5 million, we're on the books right now at about $3.5 million for the Spectrum earnout. And that will move up or down based on their performance through the year.

And our next question comes from the line of Ian MacPherson with Simmons.

So if U.S. is driving most of your consolidated revenue growth this year, Canada very little of it, could you give us any sort of indication on what the organic growth rate or range that you're contemplating is for Spectrum within all that?

Yes, sure. So I guess what we'd say for Spectrum, and this will be detailed a bit more in the 10-K when it comes out but you'll be able to see what the pro forma performance would have been for us if we had them in the business for the whole year. But they ended up at about $31 million in full year revenue, $13 million of which was during the 4 months under our ownership and the remaining $18 million or so prior to the acquisition. And the way I think about Spectrum primarily is a business that's primarily leveraged to completions count. So we believe that, that will be the underlying driver in that. As Robert mentioned, there are both technology developments and just market share gains in front of it. So we think that Spectrum -- on a full year basis, the growth there can outperform the completion count estimates in the U.S, for '18 versus '17.

Good. That's perfect. And then just one more for me. I was interested by your comments on these wells in the North Sea and U.K. onshore. Can you talk about any other offshore opportunities that are possible for this year, and whether that can be a material kind of move beyond the lab room to something more commercial for you over a reasonable time frame?

Yes. We have a project for another client in the Eastern hemisphere that will be offshore. So I mentioned one that we'd already completed a well on, there's potential several more wells to be done this year. And then moving forward, there could be further development in that field. There's another opportunity, however, that is much larger and it's about the same state of maturity for us. We haven't run -- the equipment's been ordered but it hasn't been run yet. But there will be at least 1 completion this year. And the primary driver is reducing cost in that particular area. And there's a consortium of operators who are working together to try this technology. So we developed a technology specifically for the application and it's designed to drive cost out. Now there are going to be some issues with the field, where there's going to be a delay after we run the initial test. But if we're able to drive the cost to where our customers think that they can drive it using this technology, there's the potential to go in and develop 4 additional fields in that offshore area. So over a 3- to 5-year period, this could be substantial upside for us in a market that we've not participated in before.

And our next question comes from the line of Jud Bailey with Wells Fargo Securities.

A question on just -- another question on the revenue guidance for this year. Can you maybe give us a sense -- and I apologize if you mentioned this earlier and I missed it, but embedded in your guidance, is there a way to think about how you're thinking about the incremental number of new customers or the visibility towards that? In other words have you locked in a couple of new customers with some decent-sized programs or can you give us any color in that regard on any new customer additions for 2018? And maybe the scope of any new customers that you may be signing up?

Yes, Jud. What I could say about that is that we talked about how many customers that we had worked for in 2017, at the end of the third quarter, which was 15. And we've added an additional 5-plus in the fourth quarter that we worked for. We're working for more customers now on a repeat basis than we ever have before in the U.S. And we have a pipeline that's pretty robust. And if you recall, we haven't guidance before, but we feel comfortable enough with what we see in our funnel, with our repeat customer business in the U.S, comfortable enough to be able to put that guidance out there for that 35% to 45% growth.

Okay. All right. That's helpful. And I guess, asking the other way around, does that guidance contemplate losing any customers that you may have had? Or is everyone who has been using it -- they've been pretty consistent, reliable users of the system?

We're not contemplating losing any customers in that number.

Okay. All right. And my follow-up would be, you touched on pricing a little bit, but could you comment maybe a little bit on the pricing environment for the pinpoint system in both the U.S. and Canada? There's been some talk of a little pricing pressure in some instances in Canada, and I wonder if you could just talk broadly about kind of what you're seeing just from the competitive landscape for competing products?

Sure. I'll talk first about Canada. So there have always been pricing pressures in Canada from competitors that are trying to newly enter the market. And typically what we see are competitors coming in and they have a difficult time getting jobs without discounting highly. And so we see pricing typically that's not sustainable. So we've seen this for the last few years, we continue to see it, and we continue to work through performance. And so while we would like to try to increase prices, with this added pressure, we've been able to engineer cost out of our system, and we can stay competitive even with what we would think about being predatory pricing coming in. In the U.S, our primary goal is market share growth. Our strategy has been to make sure that our technology is cost-neutral with what our customers are doing today, so that they have at least -- there's not a disincentive to use us because it's a higher price. And one of the things that we haven't seen yet, we've seen frac prices increase, which will consequently increase the price of a competitive-type job. But we've also seen coiled tubing prices increase, which would increase the price of a pinpoint job. So they kind of net out on the increased cost for plug-and-perf job versus the increased cost for the coiled tubing on a pinpoint job. So we haven't seen a big opportunity yet to move price in the U.S. So we're staying mostly focused on trying to grow market share, because we think that's a bigger benefit for us than trying to squeeze price out of our existing customers.

And our next question comes from the line of Praveen Narra with Raymond James.

I guess, following on the same line of taking down the market share in the U.S. for the sleeve business. When you think about the growth, are you thinking about that market share growth is occurring within your current customer base? Or the majority of the growth happening within your current customer base? Or is it growth out of the customer base kind of in line with Jud's questions?

Yes. It's really both, Praveen. We have new customers that we're adding, but we're also moving into additional geographic areas with existing customers. So we have multiple customers who now are trying our technology in areas that they haven't used it before. So it's really a mix.

I guess, when you -- can you talk about that process of gaining additional work in new areas where customers operate? Is that process any faster? I guess, can you give us some color on what you've seen thus far?

So far, it is a bit faster. As we've said before, if we work for a customer who has multiple geographies that they work in, selling into those different geographies is almost like selling to different customers, because they have different asset managers, potentially, and different management structures. So it's a sales cycle for each one of those areas. However, when we are working in -- for a customer that has these multiple geographies, it is a bit easier and it's a bit less time-consuming to get to the first wells that we do because the company already knows us. There is no question about the performance, operationally, of the equipment and the technology that we have. So we have some of those things that we don't have to deal with upfront. It's more around how will the technology perform in this particular reservoir versus the one I've been using it in before.

Okay. Great. And then just one quick one. I guess, for Canada, could you remind us of your liquids mix versus your gas mix.

Yes. I'd say it's about 2/3 to 3/4 liquids and -- or maybe -- yes, I'd call it 3/4 liquids plus.

That includes customers that have high condensate cuts in gas wells, right.

And we do have a follow-up question from the line of Ian Macpherson with Simmons.

Just one more Canada trivia question from me. Can you compare your mix between the deep plays and shallow today, versus -- compared to your prior period?

We'll say that it's increasing, Ian. It's -- the opportunity is substantially higher in the deeper plays than it is in the shallower plays just from a revenue standpoint. So small market share increases move the needle substantially. But you can think about something north of 50% when you think about the revenue opportunity in the deeper basins.

But the current mix is still quite small in the deeper basins for you today.

The current mix?

Your current revenue mix in Canada is still -- was it like less than 1/4 of your Canadian revenues from the deep plays?

I'd say less than 1/4 of the wells that we complete are in the deep basin. But from a revenue standpoint, it's probably more in the 40% range just because they're much higher calorie wells.

And we have a follow-up question from the line of James Wicklund with Credit Suisse.

I was meeting a while back with one of your customers and they were talking about how pinpoint completion is just the coolest thing alive and the majors just don't get it. You've got 20 customers or so right now. Can you tell us whether your reception is better at those small private as you mentioned, or the big major oil companies' side? And can you talk about like why it is what it is?

Yes, Jim. So the sales cycle -- I'll say this, the sales cycle is shorter with the smaller independents than it is with the super majors. And I think it's just because there's less layers to go through in -- of bureaucracy in the organizations. Having said that, some of our strongest supporters are super majors. I mean, Shell just published a paper earlier this year that was presented in a frac conference here in Houston, and I mean -- if our customers can get their hands on that paper, then they would see accolades for pinpoint stimulation and the value that Shell Oil Company, one of the largest operators, was able to achieve using pinpoint. So it is easier, but we are focused on the super majors as well because once we get in it makes the difference.

Okay. That's helpful. And can you send me a link to this Shell paper? I'm a member of SPE and I might be able to get it, but I'd love to read the paper. Second question, if I could follow up. Are you seeing any shift in market share, market adoption between plug-and-perf? You mentioned it was 90-plus-percent or 90% or so. I know it hasn't been long enough to really move the needle, but do you see any early indications as to -- if plug-and-perf is gaining, losing or staying the same in market share?

Well I think right now, I mean, on the margin, we're gaining market share, plug-and-perf is still maintaining its market share against the other 9% of the market that it doesn't have right now. It's -- we don't really see a shift in plug-and-perf. But based on the funnel that we've got -- I mean, there's a lot of conversations going on around how to get more efficient and they seem -- at least, what's available in the market today, there's not much left to squeeze out of plug-and-perf.

And we have no further questions at this time. I would now like to turn the call back to Mr. Robert Nipper, Chief Executive Officer, for any closing remarks.

Thank you. On behalf of the entire management team and our board, we'd like to thank everyone that joined us on the call today including all of our shareholders and the research analysts who cover us.

Finally, I'd like to give a note of personal thanks to all of our NCS, Spectrum, ATRS and Repeat Precision employees, who have put in an exceptional effort to achieve amazing results for the year. During 2017, you accomplished a number of very impressive things. It was your efforts that allowed us to more than double our revenue year-on-year, closed the Repeat Precision joint venture, prepared the company for a very successful IPO in a very difficult market and closed on the acquisition of Spectrum Tracer Services. I've said it before, and I'll keep saying it, I truly believe that we have the best team in the industry and we're committed to preserving the culture of employee development and innovation that has supported us from the beginning. We certainly appreciate everyone's interest in NCS, and we look forward to talking again at our next quarterly call. And operator, that concludes our call.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.